As we previously discussed, the IRS does not want participants to carry a $50,000 loan balance permanently by taking multiple plan loans. To prevent it, Internal Revenue Code Section 72(p) requires the adjustment of the maximum $50,000 loan balance by the HIGHEST balance outstanding in the last twelve months.

As usual, the devil is in the details and those who create the rules have to expect the unexpected by considering multiple iterations that are possible, regardless of whether they are plausible.

In this case, the general rule assumes that a participant will amortize the loan over the maximum repayment period of five years. But what happens when a participant takes and almost immediately repays multiple loans within the same year? Some practitioners argued that you had to consider the total of all previously outstanding loans for the year while others argued that only the highest outstanding loan balance in the last twelve months should be considered, without aggregating the balances. The IRS Memorandum agrees with the latter, as the following example they provided shows:

“For example, a participant borrowed $30,000 in February which was fully repaid in April, and $20,000 in May which was fully repaid in July, before applying for a third loan in December. The plan may determine that no further loan would be available, since $30,000 + $20,000 = $50,000. Alternatively, the plan may identify “the highest outstanding balance” as $30,000, and permit the third loan in the amount of $20,000. At this time, the law does not clearly preclude either computation of the highest outstanding loan balance in the above example. “

Practitioners have welcomed the flexibility provided in these administrative guidelines given to IRS agents. Like Sears, the IRS sometimes shows its softer side.

Belfint Lyons Shuman is a Certified Public Accounting firm that focuses on conducting audits of 401(k) Plans, Profit Sharing Plans, 403(b) Plans, Taft-Hartley, collectively bargained and defined contribution plans, in Delaware(DE) and Philadelphia (PA). Our team has experience conducting 401(k), 403(b), and large plan audits for plans with 120 participants to those with over 8,000 total participants. We also have experience with first-year 401(k) and other plan audits.